Debate swirls in over whether the SNB’s foreign exchange holdings should be turned into a sovereign wealth fund © Reuters

Switzerland’s central bank made almost SFr34bn profits in the first nine months of the year, as a weaker franc and stronger equity markets lifted the performance of its massive foreign currency holdings.

The record surge in earnings highlighted the impact of the franc’s weakness against the euro since the European Central Bank started moving towards winding down the exceptional measures it has taken to boost the eurozone economy.

Since the start of this year the Swiss franc has fallen 7.7 per cent against the single currency. Until July, the Swiss National Bank had been intervening heavily in currency markets, selling francs and acquiring foreign assets, including equities, to prevent an excessively strong franc hitting Switzerland’s economy.

But the franc’s recent decline, which accelerated from late July, has increased the value of the SNB foreign currency investments, which stood at SFr725bn at the end of September.

The SNB reported profits of SFr33.7bn in the first nine months of 2017, with SFr30.3bn earned on its foreign currency positions. Overall, exchange-related gains totalled SFr10.5bn, with price gains on equities contributing a further SFr14.4bn.

Debate swirls in Switzerland over whether the SNB’s foreign exchange holdings should be turned into a sovereign wealth fund along the lines of Norway’s oil fund. The large profit could increase the political pressures the central bank faces over the size of its balance sheet.

However Nadia Gharbi, economist at Pictet in Geneva, pointed out that this year’s profits followed losses when the franc was appreciating. “I don’t think at this stage that it creates a problem. Yes, they have made a big profit — but previous years were difficult.”

As well as intervening in currency markets, the central bank sought to weaken the franc with some of the world’s lowest official borrowing costs, imposing a negative interest rate of 0.75 per cent on banks’ deposits at the SNB, which earned it SFr1.5bn in the first nine months.

The Swiss franc’s recent weakness has encouraged speculation that the SNB, like other central banks, is moving towards a return to more normal interest rates.

Halting currency market intervention was already part of a “first step towards policy normalisation,” said Maxime Botteron, economist at Credit Suisse. “While this process should be very gradual, the reduction in ECB asset purchases, the strong dynamics of the Swiss economy and the weaker franc may accelerate it over the course of 2018,” he said.

But the SNB warned its financial results depended largely on developments in global financial markets and “strong fluctuations” should be expected.

“The Swiss franc really had a nice ride over the last few months,” noted Swissquote, the online bank. “However one cannot rule out a slight correction as investors are slowly trimming their risky positions as we move into the next year.”

A dovish ECB last week pushed the Swiss franc higher, and on Tuesday a euro was trading at below SFr1.16. But Kamal Sharma at Bank of America Merrill Lynch is holding to his view that the “Swissie” will fall to the 1.20 level by the end of 2018.

“We have been out of consensus in our view on CHF weakness and reiterate our belief that the SNB would prefer to see EUR/CHF trade sustainably above 1.20 before declaring victory in its efforts to weaken the CHF,” Mr Sharma wrote in a note.

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